Beware of Zombie Debts

New York State’s Office of Court Administration yesterday proposed tougher legal requirements on both creditors and third-party debt collectors seeking default judgments on delinquent debtors. Although the proposed regulations, which were outlined by the Chief Judge of New York’s Court of Appeals Jonathan Lippman in a speech, are directed primarily at the alleged abuses of third-party debt collectors, they would add to the hoops you have to jump through to collect from the member who owes delinquent debts to your credit union. There is only a thirty day comment period and I would love for those of you who conduct debt collection for your credit union to take a look at the proposal and let me know the impact you think it will have on your practices.

In more than half of the legal actions to collect debt in New York State, the debtor doesn’t bother responding to legal notice that he or she is being sued. When a debtor does not respond, a plaintiff can move for a default judgment but can only do so by submitting an affidavit outlining the amount due and attesting that the defendant was served with appropriate papers. According to the commentary of New York CPLR 3215 provided by Albany Law School professor David Siegel “the affidavit of the merits of the claim should ordinarily be made by one with first-hand knowledge of the facts.”

In proposing more regulations in this area, Judge Lippman is concerned that too many debt collection actions are being commenced by people with without first-hand knowledge of a claim. This means that so-called original creditors, such as a credit unions seeking to collect a debt on a delinquent credit card, for example, would have to submit an additional affidavit. A credit union employee would have to swear they have first-hand knowledge of a credit union’s records, the date when a debtor entered into the agreement on which he had defaulted, and provide the court with the last four digits of the debtors account. A similar affidavit would also have to be submitted by third-party debt collectors.

We can once again blame the questionable foreclosure practices of a handful of lenders for these new requirements. The OCA took the lead in cracking down on so-called robo-signing by requiring lawyers to have first hand knowledge of the foreclosure actions they were bringing into Court. The Chief Judge is concerned that many of these same “robo signing” practices are being used by debt collectors.

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By the way, it was great to see so many of you at the State Governmental Affairs Conference. As proposals like this demonstrate, state level initiatives impact your credit union. It is absolutely crucial that law makers know of your concerns first hand.